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What to do if your credit history is 'thin'

Ironically, the best way to get a loan may be to first get in debt.

Quentin Cottrell

Sarah Gardner: So, do you have any idea what your credit score is? You know, that three-digit number that can make your borrowing life a breeze or a bust. FICO is probably the score you've heard of, but recently FICO's gotten some competition. These credit scores, though, have one thing in common -- they require numbers to crunch. But about 50 million Americans don't have enough of those "numbers." In the industry, those people are called "thin files."

And as Marketplace's Jeff Tyler explains, lenders don't always think "thin" is attractive.


Jeff Tyler: It's good to have someone looking out for you.

Quentin Cottrell: One at a time. Everybody be careful.

The driver watches the kids get off the van at this learning center near Atlanta. Forty-year-old Quentin Cottrell is there to greet them. But who's looking out for Cottrell? He owns Aim To Please Transportation. His five passenger vans shuttle kids and senior citizens around town.

Cottrell owns two more vans, but they're broken.

Cottrell: I need to update these vehicles so I can get bigger contracts and offer better service.

So here's the problem. Cottrell wanted to add mechanical lifts for wheelchair access. He figured getting a loan would be easy because he thought he understood what the bank expected of him.

Cottrell: I was under-writing for eight years. So I have a credit background. So my thing was, I didn't want to be in debt because that's what I was taught. A, by my parents. And B, by the industry that I came from.

So he made a calculated decision to wipe out his debt.

Cottrell: I paid off three vehicles. I had three or four credit cards I paid off.

He also paid off a small mortgage. Finally, he achieved what many of us only dream about -- he erased all his debt. And Cottrell believed that was a good thing.

But he was wrong.

Cottrell's what's known in the industry as a "thin file" -- he doesn't have enough credit history to generate a credit score. Lenders want to see that consumers already have some debt and know how to manage it. The industry-standard FICO score requires consumers to have a minimum of one credit account open for at least six months.

Cottrell discovered that being debt-free counted against him.

Cottrell: The bank was telling me, great job on paying off your debt. But, you know, you need to get back in debt in order for us to help you.

This little wrinkle trips up millions of people. Sometimes they're elderly folks who get labeled as "thin files" because they've paid off the mortgage and have no other debts.

Immigrants also struggle with the thin file dilemma. Many are too new to this country to have accumulated much debt. Then there are people like Samer Zaky. He's philosophically conflicted about the whole idea of borrowing money.

Samer Zaky: I believe I was in that position once. I do not sleep at night until I give him all his money.

Zaky is originally from Egypt.

Zaky: I was raised that, if you we need something, we save, then get it. We don't borrow.

These days, Zaky lives in Pittsburgh with his wife and young daughters. As he helps them brush their teeth, Zaky teaches his kids to count in Arabic.

But what will he teach them about debt? Their dad has a good job doing post-doctoral research at the university. He pays his bills on time. But with no credit history, his bank turned him down for a car loan. Not only that -- his "thin file" status also makes some services more expensive.

Zaky: I don't have a cell phone because they wanted a $400 deposit because I don't have credit history.

Zaky feels penalized for having no debt.

Zaky: My frustration was that the credit score doesn't consider my paycheck. It doesn't consider how I pay my monthly bills. My rent. My electric and gas bills. Car insurance. These things are not considered at all.

The three main credit bureaus -- Experian, TransUnion and Equifax -- have come up with an alternative to the FICO score. VantageScore does consider things like rent and utility payments.

Barrett Burns is president and CEO of VantageScore Solutions.

Barrett Burns: We designed it with the consumer in mind, so that we could score more people, be more accurate, and have more consistency across the three bureaus. We will score somebody after one month of credit usage. Other models wait for six months of credit usage.

VantageScore generated a credit score for Quentin Cottrell, even though his credit card accounts were already closed.

Cottrell: If you have closed items right now, and none open, but you paid them off in a timely manner, they don't penalize you for that. They still grant you a great score.

Cottrell has a great score. His problem is finding a lender who'll accept VantageScore.

Cottrell: I've approached about eight banks. The few that have heard of it, they say they don't go by that model. The rest of the banks I went to, they never heard of it. They think it's something I made up."

Most of the banks told Cottrell that they rely on some variation of the FICO score. FICO says it will soon roll out a new model of its own that will factor rent and utility payments as part of the equation. But until these new, more comprehensive scores catch on with lenders, consumers with little or no credit history run the risk of being labeled a "thin file."

It's a topsy-turvy calculus, where you need to be in debt to qualify for a loan.

I'm Jeff Tyler for Marketplace Money.


Gardner: Now, we're big believers in paying down debt on this show, so this story worried me a little bit. That's why I've asked Jeff to join me in the studio to put a little flesh on the bones of this issue. Hi Jeff.

Tyler: Hi Sarah.

Gardner: I thought this story was so interesting and it raised a lot of questions. The first being, we said that 50 million Americans fit this thin file description. I'm assuming that most of them, the majority though, are not that well off. Right?

Tyler: Well actually we don't know that. There was a Brookings study a few years back that pegged the number of thin files between 35-50 million people. Now a lot of those are "un-banked," which are very poor people. But there are a lot of other folks that are middle class or even more affluent. I was a little confused about this stuff myself, so I reached out to some folks to get a little bit of advice and one of the guys that I spoke with was Adam Levin, who is the chairman and co-founder of Credit.com, which is a financial services website. Once upon a time he was the head of consumer affairs in New Jersey. We can assume that he was at least middle class or maybe doing a little better than that. And he tried to open a credit account at a big department store.

Adam Levin: So I applied for the card and was rejected based on the fact that I had no credit. It's because I had come from a pretty successful background and when I was younger, I never really thought about it. And the headline story in the political section of the largest newspaper in New Jersey basically said can you imagine this -- they denied the head of consumer affairs a credit card.

Gardner: That's amazing. You always think it's so easy to go get a Macy's card or whatever. Right?

Tyler: Well, it is once you get the publicity. Because once that story hit, the head of whatever that department store called him up and said, 'Hey, what kind of credit can we give you in a hurry?'

Gardner: Oh, I bet you did. So Jeff, what do lenders want to see then from people?

Tyler: Well what they really want to see is how reliable you are as a payer, in paying back your loans. They want to know, how much credit do you have, how much of that credit are you using? If you go above about 30 percent, that's negative. They want to know your mix of credit history and how many inquiries you get on your credit history.

Gardner: So in the end here then, give us a little hope here. What do consumers do? Say you find yourself in this situation, where you are a thin file? What can you do to remedy the situation so that you can get a loan or whatever else you're trying to obtain?

Tyler: There's a variety of ways that consumers can get on top of this. They can take control of this. It affects a lot of immigrants. One thing that immigrants can do is if they have an American Express or some other credit card, they can bring their credit history from other countries and bring it into this country and have a credit history that way. Adam Levin has some other ways that you can build credit if you are a thin file.

Levin: You could become an additional card holder on a credit card of a sibling or parent. You could have someone co-sign for you. You could use a CED as collateral for a loan. Sometimes young people have an easier time, for instance, because of promotions by auto manufacturers to get an auto loan. Secured credit cards, another way.

Gardner: Now what did he mean, Jeff, by secured credit cards?

Tyler: A secured credit card is putting the money up front and so it's not risk to the bank to give you the card because they've already got the money.

Gardner: Right. OK. Marketplace's Jeff Tyler, some really good information. Thanks a lot.

Tyler: Thank you.

About the author

Jeff Tyler is a reporter for Marketplace’s Los Angeles bureau, where he reports on issues related to immigration and Latin America.

Quentin Cottrell

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